Until that morning, the site had often ranked in the top-ten nonpaid results for search terms such as "free cell phones" and "family plans." And like thousands of other businesses, Keiter's company relied on free Google searches to drive customers its way.

"Google is going to bleed away a lot of our sales," says software developer Mike Landis, near his office in Asheville, N.C.

Search under 'Google, competitor.' The list of prospective rivals grows longer every day. How these various clashes play out will have major consequences for small businesses.
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Keiter had fallen victim to what's known as the dreaded Google dance: sudden, seismic shifts in search results that occur whenever Google's engineers decide, without warning or explanation, to tweak the software algorithms that determine how the mighty search engine processes keywords.

It's like owning a shop on a busy street corner where all the pedestrians suddenly and mysteriously vanish.

In the months after he fell prey to the Google dance, Keiter saw his revenues plunge some 20%. When he contacted Google for an explanation he was simply told that the algorithm was secret sauce. "There was nothing I could do," he says. "They make changes in their ivory tower, and it ripples through to the little guy."

When FSB asked Google spokesperson Barry Schnitt to comment on Keiter's experience, he responded with a written statement: "Just as the web changes constantly, Google continues to modify and refine our algorithms to improve the quality of our objective search results."

In the lives of small-business owners, Google (Charts) looms as the new Wal-Mart (Charts). Many entrepreneurs fear and despise the retailing giant for mistreating vendors and vaporizing small competitors and entire business districts. Yet Wal-Mart also is lauded for delivering a vast range of consumer goods at rock-bottom prices. Supplier contracts with Wal-Mart represent a boon to thousands of entrepreneurs and a dream to many more. Whatever one's attitude, the wise small-business owner learns as much as he can about Wal-Mart and its ways-and weaknesses. He adapts or dies.

Smart entrepreneurs are taking a similar approach to Google, which can decimate their sales through a whim of search-engine coding, or deliver a flood of new customers and ad revenue. How Google affects your company depends on how quickly you accept its power and how cleverly you accommodate it.

As moving targets go, Google is a blur, perpetually ranging into new territories, from free software to classified ads to telephony. And while most large companies are tight-lipped, stealth is the very cornerstone of Google's corporate culture. "Google is virtually impenetrable," says Dave Taylor, an Internet consultant in Boulder. "It's ironic, because the company is all about transparency and openness on the web."

Still, FSB set out to take a snapshot of this protean company in full flight. Our goal was to gauge how Google is affecting small-business owners in America today, and what entrepreneurs can expect from future versions of Google.

We reached two main conclusions. First off, Internet search is going through a transitional period. Small online businesses in particular are starting to chafe at the rising cost of search-term advertising. Some of them may soon seek alternatives to a marketing strategy based solely or primarily on search.

Also clear in our snapshot: To many small businesses, Google is both friend and foe. Thousands of entrepreneurs now find most of their customers via search-based marketing. Other businesses-niche software and book publishers, for example - risk imminent extinction thanks to Google's free software releases and (shall we say) innovative approach to copyright law.

Hanging in the lobby of building 43, an airy, modern structure on Google's sprawling Mountain View campus, is a giant screen that displays a dynamic map of the world. Every single Google search undertaken by anyone anywhere registers on this map in real time.

Map of the world

Silk-thin lines emanate from places such as the Marshall Islands, where it's the middle of the night and only a few Internet surfers - maybe even just one - are currently using Google. Meanwhile, fat, colored pipelines rise from high-traffic areas such as China (teal), Germany (green), and the East Coast of the U.S. (red). There are still large blank spots across sub-Saharan Africa and other regions that remain terra incognita on the Google globe.

For many entrepreneurs here in the U.S., Google has helped make the Internet a viable place to do business. Roughly 500,000 U.S. small businesses rely on unpaid or "natural" search for the bulk of their revenues, according to John Battelle, author of The Search: How Google and Its Rivals Rewrote the Rules of Business and Transformed Our Culture.

Another half-million firms participate in Google's paid-search advertising program. Two-thirds of those are small businesses that collectively contributed $2 billion to Google's total revenues of $6 billion last year.

Thanks to Google, many startups have reached profitable niche markets at little cost. Take Shark Diver, a San Francisco adventure-travel company that Patric Douglas founded in 2000. Shark Diver (sharkdiver.com) arranges tours to tropical locales worldwide where shark fans can frolic underwater with their favorite predators.

Douglas, 38, estimates that at most, 100,000 people in the U.S. possess the requisites for this pursuit: diving experience and a crazy streak. By bidding on search terms such as "cage diving" in Google auctions, he has been able to zero in on his target market. Shark Diver is now a profitable business with 20 employees and about $1 million in annual revenues, according to Douglas.

His thoughts on Google? "They're gods. Back in the day, there's no way I could have drilled down to a niche this small."

More established businesses have been able to slash their marketing budgets by switching to search-term advertising. Ray Allen, 64, quit the cutthroat New York City advertising industry to start American Meadows (americanmeadows.com), a wildflower-seed company based in Williston, Vt.

Ten years ago Allen was spending $300,000 a year on magazine ads and print catalogs to generate about $1 million in annual revenues. Today he spends just $120,000 a year (mostly with Google, but also with Yahoo's (Charts) competing pay-per-click ad service) to generate more than $2 million in revenues. "This is a total revolution," crows Allen.

Yet Google's stated goal of organizing all the world's information is almost guaranteed to give its advertisers headaches. If Google has its way, every word ever written and every image ever created will one day be cataloged on its servers.

From a business-PR perspective, that means good press will show up in search results. So will corporate scandal coverage, leaked proprietary information, bad product reviews, blogger rants-you name it. As the volume of searchable information swells, advertisers will increasingly find themselves in a bind. As night follows day, embarrassing content will pop up next to their ads.

Google may yet devise software that will allow companies to choose what sort of search results they wish their ads to be associated with. Meanwhile, don't be surprised to see advertisers squirming under Google's digital hoof. One likely trigger is rising search-term rates.

Today hot terms such as "medical malpractice lawyer" and "debt consolidation" routinely auction for $10 a click or more. According to Jupiter Research, the average cost for a paid-search keyword rose from 39 cents in 2004 to 44 cents in 2005 and is expected to hit 58 cents by 2010. (These are industry averages; Jupiter does not break out Google from Yahoo and other search competitors.)

Google generates nearly all its revenues by selling ads. But businesses may soon balk at seeing Google leech away an ever-increasing share of their revenues. Yes, paying Google only if someone actually clicks on an ad is more efficient than a traditional TV or magazine ad, where you pay for eyeballs. Studies show that 1% or 2% of clicks generate paying customers. While more than double the typical conversion rates for print and TV ads, that's still a low percentage game.

"I predict a rebellion," says Jakob Nielsen, principal with Nielsen Norman Group (nngroup.com), an Internet-user research firm in Fremont, Calif. "People are going to tire of spending so much for web traffic."

Expect many businesses to seek other, cheaper marketing techniques. "Search-based advertising has been all the rage, but that doesn't mean there aren't other options," says Guy Creese, an analyst with Burton Group (burtongroup.com) in Midvale, Utah.

As the blogosphere expands and matures, more entrepreneurs could discover that blogging is an efficient way to attract customers. Other small businesses may find that it pays to purchase ads directly from website owners rather than through Google. Say you run a home-building company. Placing an ad on a popular real estate industry site might be cheaper than paid search - and might prove a more direct route to your target audience.

Competing with the Goliath

Travel agencies. Newspapers. Realtors. Advertising firms. Software makers. What do these industries have in common? All face a serious competitive threat from Google. "Google is the new Microsoft and then some," says Mark Stevens, CEO of MSCO (msco.com), a marketing firm in White Plains, N.Y. "Google poses a threat to more companies in more industries than anyone else in history."

When Mike Landis learned that Google had started offering free web-traffic monitoring software, he knew it spelled trouble for his company, Mach5 Development, based in Asheville, N.C. Landis, 41, sells a similar application and now finds himself competing with a behemoth. Once again, Google responded with a canned statement. This one reads in part: "We believe there is room for many players in this space."

Landis isn't so sure. Mach5 (mach5.com) has five employees and just $300,000 in annual revenues. "Obviously Google is going to bleed away a lot of our sales," says Landis. "We're not as attractive to our customers anymore."

He's not alone: Numerous software publishers have been threatened by Google's habit of releasing freeware that competes with their products. Google makes no apologies for crushing small competitors. "This company is organized to be disruptive," CEO Eric Schmidt said in a telephone interview with FSB.

Google, which had amassed a $2.9 billion war chest as of this spring, has been on an acquisition rampage of late, buying up companies that make software for everything from mapping to photo editing. That's a boon for Google users, but it puts many software vendors in the unfortunate position of trying to sell a product that Google is offering gratis.

Mega-library

Google's recent move to assemble a vast digital library of books is viewed as a threat by much of the global publishing industry. Google decided to forgo the usual process of obtaining permissions from thousands of book companies.

Instead it executed a nifty end-run around the publishers, cutting deals with five large libraries - including the New York Public Library and the University of Michigan library system - to digitize their entire collections. In exchange, the libraries will get digital versions of their holdings. Google will walk away with the ability to provide brief excerpts (so-called snippets) from millions of books in its search results. Google will also sell ads against these results.

Snippets or no, many publishers contend that Google plans to pirate a universe of copyrighted material. Last October, five large publishing companies - including McGraw-Hill (Charts), Penguin Group, and Simon & Schuster - sued Google for copyright infringement. "We believe what we're doing is legal and consistent with copyright law," says a Google spokesman.

Google stresses that any publisher can keep its books from being digitized simply by sending a list of titles to Google. But that's not good enough for Lynne Rienner, whose Boulder-based book publishing company (Lynne Rienner Publishers; rienner.com) is 22 years old, has 20 employees, and books less than $5 million a year in sales.

"Google is trying to turn the copyright laws on their head," she says. "Why should I have to let Google know which books they can't copy? They should be seeking permission from me regarding which books they can copy."

Rather than compiling a list of her company's 1,200 titles ("a waste of my staff's time"), Rienner fired off an angry letter to CEO Schmidt. Google responded with a letter agreeing not to copy any of her books. Rienner is unmollified. She worries that she will be cut out of some future digital moneymaking opportunity. "Books are my unique content," she says. "I'm sure the smart people at Google are busy dreaming up all kinds of ways to make money off them."

For now Rienner has found a symbolic way to register her displeasure: She has started using Yahoo's search engine instead of Google's.

Bull in a china shop

"Google is not yet a mature business," says CEO Schmidt. "Our pace of innovation is not slowing down, I assure you. If anything, it's accelerating."

In effect, Schmidt's company is many-tentacled and moving at light speed. Small businesses race to keep up. Neil Kugelman, founder of Goldspeed.com, an online jewelry business based in Lynbrook, N.Y., has his computer programmed to alert him to any news about Google. He's especially on the lookout for announcements about new software.

To run his business, Kugelman uses a variety of free software programs offered by Google, and the company is constantly adding to its slate of offerings. As long as you're giving away software, why not hand over the whole box?

The argument: Computer hardware prices are plummeting in any case. Experts say Google may one day start giving away PCs, reducing them to the equivalent of the free calculator you get when you open a bank account. The Google PC would come loaded with ad-supported software designed to keep people Googling - and not necessarily doing their work.

A recent study by the Nielsen Norman Group found that employees spend 11 seconds a day, on average, glancing at ads surrounding free software. Clicking on ads wastes another 15 seconds a day. These are tiny increments of time, but they add up. Over a year, Nielsen Norman estimates, a free computer could easily cost a company $100 an employee in lost productivity.

Another new frontier for Google is cellphones. Already the company is delivering services such as traffic updates to phone screens. Many analysts expect Google to team up with a cellular service provider such as Sprint (Charts) or Cingular to offer a mobile pricing tool.

Cellphones already have cameras, goes the reasoning. So why not add a bar-code scanner? You could walk into an electronics store and scan a DVD player. Up would pop the price, along with Google ads for various area merchants, touting their lower prices on the very same item. "This is a logical direction for Google," says Roger Entner, a telecom analyst in the Boston office of Ovum, a research firm. "It would extend their advertising reach out onto the actual floors of merchants."

Or what if Google offered a certified same-day international digital document-delivery service? That's eminently doable, given Google's massive server farm. America's entrepreneurs would turn cartwheels in their Dockers if Google figured out a way to beat FedEx (Charts) and other couriers on both price and speed.

Or what about an e-mail translation service? Simply send an English e-mail to your Chinese supplier via google.chinese.com. Google would translate the message into Chinese and forward it to the addressee - in real time.

If nothing else, expect Google to continue challenging established ways of doing business. For good and ill, Google is one of the most awesome forces ever to be unleashed on the business world - or rather the Google world in which all business owners now live.